Surveys show that the most common New Year’s resolutions are physical and financial. I have certainly made my share of both of these types of resolutions over the years but I have had a lot more success in keeping my financial resolutions than my physical ones. Why is that? Is it just my personality or is there something else happening that might help you keep your financial resolutions?
Improving ourselves physically and financially are similar in many ways. Both have two major components; eating and exercising for the physical; spending and saving for the financial. So why is it easier for me to keep my financial resolutions than my physical ones?
Substitute Technology for Willpower
I found the key in something Money Magazine Managing Editor Craig Matters wrote in the Editor’s Note of the January/February 2014 issue. Matters noted that in the financial realm it is possible to “use technology as a substitute for willpower.”
Matters was referring to the ability to have money automatically deducted from your paycheck and saved or invested. You can make the decision to save once and have it done automatically for you thereafter. Once signed up it takes time and effort to break the resolution, making it much more likely that you will follow through.
This puts the saving side of the financial equation on auto-pilot. You don’t have to rely on memory to transfer money to savings each month or willpower to part with your money. It is all done automatically. You can be well on your way to improving your finances with one simple decision.
The Challenge of Physical Goals
Physical goals, on the other hand, require constant vigilance. Each day you have to decide anew if you are going to exercise and the decision to eat healthily must be made almost constantly, at least until bad habits are broken.
I have had some heart problems in the past and I just got back from the doctor where they did some tests to see how things are going. In the past when I had these tests I had to run on a treadmill so the doctor could see how my heart reacts to physical exertion. This time they simply injected me with a medicine that simulated physical exercise. It raised my heart rate and dilated my blood vessels without any effort on my part.
This medicine didn’t actually provide the benefits of physical exertion, but what if it did? What if we could take a pill each morning that provided all the benefits of exercise without the effort and pain? My guess is our success in staying physically fit would increase. Seeing the results of this magic pill might even motivate us to eat better and accelerate the process of physical improvement.
This, essentially, is what an automatic savings program can do for you financially. It gets you half way there with a minimum amount of effort and pain.
Setting up an automatic savings program is a great first step to improving your finances but to be really successful you also have to control your spending. What is the key to doing this?
To increase savings we automated it and made it as easy and painless as possible. Our goal on the spending side of the equation is to decrease it. Therefore, we must make it manual and as difficult and painful as possible.
The best way I know to do this is by using cash. It is much more difficult and painful to spend cash than to use a card. In addition, as I have written about elsewhere, cash can be an incredibly compelling scoreboard.
If you have a certain amount of money set aside for a certain purpose, and it has to last a certain amount of time, it is easy to keep track of how you are doing. It is painful to watch the stack of money disappearing as you spend it, and it is impossible to unconsciously spend more than your budget. If you break your budget you have to make a conscious decision to do it. You can’t do it accidently.
Keep your financial resolutions by substituting technology for willpower to make saving automatic, easy and painless. Control spending by making it manual, difficult, and painful.
- If you haven’t already, set up automatic deductions from your paychecks to save for retirement or other goals. If you are already using automatic deductions increase the percentage being deducted each time you get a raise.
- Pick three to five problem spending categories (for example, groceries, eating out, clothes, and entertainment). Label an envelope for each of these categories and set a realistic budget for each. At the start of each month place enough cash in each envelope to cover the budget and use the cash from the envelopes for any purchases in these categories. When the cash is gone you are done spending until the next month.
Automating your savings and making your spending manual will help you keep your financial resolutions. Now, if they would just hurry up and invent that pill that makes exercising easy and painless we could be both thinner and richer.